After U.S. Federal Reserve Chairman Powell hinted that interest rates will be kept higher for longer to reduce soaring inflation in the United States, the yuan exchange rate broke through the 6.9 yuan per dollar on Monday (29th), closing at a record level on the shore. The lowest level since August 20, 2020.
The offshore RMB exchange rate once fell by more than 300 basis points on Monday, falling below 6.93 at the lowest level, which also set a two-year low.
The yuan has fallen more than 2.5 percent against the dollar so far this month, on track for its biggest monthly drop since April.
Today, major banks are targeting RMB 7. Goldman Sachs and Bank of America both expect the yuan to fall to 7 against the dollar, its lowest level since July 2020, depending on the extent of China’s currency intervention.
Tommy Xie, head of Greater China research at OCBC Bank, said the pace of the yuan’s depreciation was not as severe as it was in April. Therefore, the PBOC may be more patient, and the PBOC can use old methods such as lowering the foreign exchange reserve requirement ratio and verbal intervention to prevent the losses from deepening.
Goldman Sachs pointed out in its latest report that Fed Chairman Powell’s hawkish remarks will cause the dollar to continue to appreciate against a variety of non-US currencies, including the renminbi. Add to that the lack of economic growth in China and an unexpected rate cut by the People’s Bank of China this month, all providing reasons for the devaluation.
Goldman Sachs predicts that within 3 months, the yuan may fall back to 7 yuan. Positive factors such as trade surplus, the strong central parity of the RMB against the US dollar, economic stabilization in the later period, and a low currency value may only drive the RMB to rise again within the time span of six months to one year.
Bank of America predicts that by the end of this year, the onshore renminbi may fall below 7 against the dollar.
Guan Tao, global chief economist at BOCI Securities and a former State Administration of Foreign Exchange (SAFE) official, said government agencies and the market had shown greater tolerance for a weaker yuan and adapted to greater volatility in the currency.
However, he believes that if there is a pro-cyclical herd effect or overshoot risk in the market, it is expected that the relevant authorities will introduce measures to correct it in due course.
